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Apple, Inc.'s iPad May Be on the Verge of a Comeback

Apple, Inc.'s iPad has been left for dead by many industry observers. However, a return to sustainable sales growth could occur by late 2015.

Earlier this year, when I wrote that Apple's (NASDAQ:AAPL)iPad was in trouble, I got a lot of pushback from readers. At that point, Apple had not yet reported its March quarter earnings, and in the December quarter iPad revenue had grown 7% and iPad unit sales had risen 14%. This may have made my warnings seem alarmist.

What was then controversial now seems like conventional wisdom. Apple finished fiscal year 2014 with three consecutive quarters of declining iPad sales, and most analysts are expecting further declines in fiscal year 2015.

iPad sales declined in FY14 despite the launch of the iPad Air (Photo: Apple)

However, the iPad pessimism may have gone too far now. While iPad sales declines could continue for a few more quarters, Apple is well-positioned to drive a return to sustainable sales growth by the end of 2015.

iPad sales plummetApple has now endured three straight quarters of weak iPad sales. After the 14% iPad unit sales gain in Q1 of fiscal year 2014, iPad unit sales dropped 16% in Q2, fell 9% in Q3, and fell 13% in Q4. For the full year, Apple sold about 68 million iPads, down 4% from a peak of 71 million in fiscal year 2013.

Analysts almost universally expect Apple to report another iPad sales decline this quarter. Apple faces a tough comparison to last fall, when it launched the popular iPad Air.

Interestingly enough, one highly respected Apple analyst expects another big drop in Q2, when Apple should theoretically benefit from an easy comparison. Ming-Chi Kuo of KGI Securities expects iPad unit sales will fall 40% year over year in the March quarter to 9.8 million. That would be the lowest level of iPad sales in any quarter since 2011.

Better times ahead?

Most iPad usage still comes from older models (Photo: The Motley Fool)While the iPad seems to be stumbling now, there are several reasons to believe that sales will start to recover in 2015. First, the iPad installed base is aging. More than a quarter of iPad usage still comes from the original iPad and the iPad 2. In fact, this year's new models and last year's new models together account for only about a quarter of the global iPad installed base.

While many people who bought iPads in 2011 and 2012 haven't felt the need to upgrade yet, Apple's strong customer loyalty ensures that most will eventually replace their iPads. By the end of 2015, there will be a very large number of iPads in the three year-four year age range.

This should lead to higher upgrade demand in developed markets where iPad sales took off quickly but have slumped in the past year. (Apple CEO Tim Cook pointed out earlier this year that iPad demand is still growing robustly in emerging markets.)

Second, Apple is in a good position to start conquering the enterprise market. In July, Apple announced a partnership with International Business Machines (NYSE:IBM) to target the enterprise market. IBM will create more than 100 industry-specific iOS apps and integrate them with its own cloud and service offerings and sell iPhones and iPads to enterprise clients through its own sales force.

On Wednesday, Apple and IBM announced that the first wave of enterprise apps were ready. These apps target various industries including transportation, banking, government, and retail.

It will take time for this to translate into large numbers of iPad sales. Corporate IT departments generally test a new product or service for quite a while before going ahead with a broad rollout. However, the long-term opportunity is tremendous. The enterprise installed base of PCs is about 500 million. In the future, enterprises could also use hundreds of millions of iPads.

A third (related) factor that could boost iPad sales next year is the potential release of a larger iPad Pro with a 12"-13" display. While the iPad Pro has still not been officially confirmed by Apple, many analysts expect this product to show up at some point in 2015. Enterprises might prefer a larger iPad, which would be better for working with spreadsheets and multitasking.

Still an iPhone companyFor the foreseeable future, Apple's financial results will continue to be driven by the iPhone. Apple already gets well over half of its profit from the iPhone, and the new iPhone 6 and iPhone 6 Plus are catalyzing strong sales growth. Strong iPhone sales momentum will allow Apple to grow earnings in the coming year even if iPad sales continue to decline.

However, by the end of next year, iPad sales should be able to return to sustainable growth as the consumer replacement cycle begins in earnest and enterprise adoption accelerates. That will allow the iPad to pick up some of the slack if iPhone sales moderate after the current upgrade cycle. Other new product lines like Apple Pay and the Apple Watch will add to Apple's long-term growth as well.

Author

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry! Follow @AdamLLW